Dear SaaStr: Can I Buy Out My Seed VCs? We’re Doing Well But Not on Venture Path Anymore
Look, it does happen and it’s possible. Expensify bought out Redpoint out before their IPO. Buffer did something similar. But it’s hard.
It’s hard because if you are doing well enough to buy them out, they often have no real reason to sell. Especially for a modest or zero return after many years.
The simplest way is via a secondary sale — if you can line up someone else to buy their shares.
But even if it’s hard, in theory, buying out your seed VC is a smart move if they’re not aligned with your long-term vision. Especially if you are at scale but growth has slowed and you’re not on the same page. It gives you control and lets you bring in a partner who’s more supportive of your goals.
Here’s how to approach it:
1. Understand Your VC’s Position
- What’s their ownership stake? If they own, say, 20%-25%, they’ll likely want a return that reflects your current ARR and growth. If your ARR is $4.5M and you’re profitable, they might expect a valuation of 5x-8x ARR. But if they’re unhappy or need liquidity, they might settle for less—closer to their original investment or a modest return.
2. Find a Long-Term Partner
- Private Equity (PE): PE firms love profitable SaaS companies with $4M-$10M or ideally $20m+ ARR. They’re often willing to buy out early investors and let founders keep running the business. For example, Vista Equity or many smaller firms might step in, buy out your VC, and give you the flexibility to grow at your pace. They typically pay 3x-10x ARR, depending on your growth and margins.
- Strategic Investors: Some growth-stage VCs or strategic investors might also be interested in buying out your seed VC. They’ll want to see a clear path to $10M ARR and beyond, but they might offer better terms than PE if they believe in your long-term potential.
A great SaaStr deep dive on how Logikcull sold to Private Equity for almost $300m here:
3. Bank Financing
- If you’re profitable, you could explore a bank loan or debt financing to buy out your VC. This avoids dilution and keeps you in control. Look for lenders who specialize in SaaS or recurring revenue businesses. They’ll typically offer loans based on a multiple of your ARR, often 1x-2x ARR. For example, with $4.5M ARR, you might secure $4M-$6M in debt, which could cover the buyout. But this really only works in practice if the initial investment was fairly small.
- Caution: Debt can be risky if your growth slows or you hit a rough patch. Make sure you have enough cash flow to cover repayments without jeopardizing your operations.
4. Structure the Deal
- Cash Buyout: If you have the cash or can secure debt, offer a clean buyout at a fair valuation. This is the simplest option but requires upfront capital.
- Secondary Sale: Bring in a new investor to buy out your seed VC. This could be a PE firm, growth-stage VC, or even a strategic partner. They’ll likely want a stake in the company, so make sure they’re aligned with your vision. Secondary sales happen all the time, and are the simplest way to do it. However, it doesn’t return the shares to the founders / the other equity holders.
- Hybrid Approach: Combine cash and equity. For example, pay your VC $2M in cash and let them retain a smaller stake for a potential future upside. This reduces the upfront cost and keeps them partially invested in your success.
5. Negotiate Smartly
- Start by understanding your VC’s motivations. Are they under pressure to return capital to their LPs? Are they unhappy with your growth? Use this to your advantage in negotiations.
- Offer a fair but firm valuation. If they’re pushing for a higher multiple, remind them of your 60% gross margins and the challenges of slower growth. If they’re reasonable, you might be able to buy them out close to their original investment.
6. Final Thoughts
- Buying out your VC is a big move, but it’s worth thinking about it if they’re not aligned with your goals. Whether you go with PE, a strategic investor, or bank financing, the key is to find a partner who believes in your vision and is willing to support you for the long haul.
- Also remember they bet on you. Even if there’s been some friction, just remember they likely took a lot of risk.
Have you had any conversations with PE firms or strategic investors yet? They’re often more flexible than you’d think, especially for profitable SaaS companies like yours. If so, start there.
